Paying Down Debt

America's In Debt: What Can You Do About It?

You’ve resolved, yet again, to pay down some debt this year. Want to increase your odds of success? Then make sure your plan includes all three of these key ingredients: motivation, money and method.

Here are the Cliff notes.

Motivation

Losing weight, losing debt, spending more time with your family: If you want to change your life, you’ll have to change your habits. And changing habits is no picnic; it requires strong motivation.

So, find something compelling to motivate you. I’ve lived debt-free for many years now, and here’s what motivates me: the realization that for every hour of my life that I swap for money (i.e., working) I’ve forever lost an hour of my life. Time is our only nonrenewable asset, so my goal is to spend as much of it as possible doing what I want to do and as little as possible doing what I have to do.

What does that have to do with debt? Everything. Because paying interest is a double-edged sword; it not only wastes money, it carries a high opportunity cost. Opportunity cost is accounting jargon for what money you spend today costs you in terms of the opportunity to have more money tomorrow. Let’s bring the point home with a simple example.

Say you borrow $100,000 with a 9.4%, 30-year loan and make minimum payments. You’ll make 360 payments of $833, for a total of about $300,000: $100,000 in principal and $200,000 in interest. If you earn $30 an hour, that means the interest bill alone totals about 6,700 hours of work: more than three year's worth.

The real killer is opportunity cost. If you saved $833 a month for 30 years instead of spending it, and earned 9.4% instead of paying it, you’d have ended up with about $1,600,000. Translated into work hours, at $30 an hour, that’s 53,000 hours or about 26 years.

Of course, we can’t know the true opportunity cost in our example until we know what you did with the $100,000 you borrowed. Maybe you invested it into a business that’s going to be worth billions. However, one thing’s for sure, debt incurred to pay for things that go down in value (such as virtually anything that you can buy with a credit card) means huge opportunity cost, which in turn steals from you the most valuable thing you have: your life.

This is my motivator: what keeps me out of debt. However, if that’s not motivation enough for you, find something that is because without strong motivation you’re probably doomed to failure. Of course, motivation alone won’t do the job. You’re also going to need…